Interest Only Loans: Tips & Advice
Interest-Only Loans: The Dangers Behind Them And Who Should Avoid Getting Them Today...
When you have an interest only mortgage, it can be a very dangerous thing. After all, you borrow more to pay less each month. If you want to find an affordable way to buy that dream home, you may have thought about an interest-only mortgage.
You may think that an interest only mortgage is a good deal. After all, you qualify for a high loan and make low monthly payments for a period of time… at least until your financial circumstances change for the better.
However, most folks with this kind of loan find themselves in a deep financial hole when that time period is over and higher payments kick in.
Mortgages For Dummies co-author Eric Tyson said he and his co-author are proud of the fact that they’ve been telling folks to steer clear of an interest-free only loan or no down payment loan that could financially strap them.
A Look At An Interest-Only Mortgage: What It Is
It’s important you learn the difference between principal and interest when talking about interest-only mortgages. Interest is the fee the homebuyer is paying to borrow the money from the home mortgage lender. The principal is the loan’s actual amount. Most people don’t know that an interest-only loan is not an actual loan but rather an option that’s attached to some kind home loan mortgage.
So, what exactly is an interest-only mortgage? It’s when the borrower is just paying on the interest of a principal balance for a certain period of time.
In this time period, the borrower will not place any money toward the principle balance and won’t be paying off the actual loan. In typical amortized mortgages, the monthly payment a person pays goes to both the interest and the principal of the loan.
This results with the borrower having lower monthly payments in the beginning of the loan. However, with no payments going toward the principal, no equity is being built into the home.
Like with any loan, there are various types of interest-only loans. The majority of them have adjustable rates, which stay set before becoming variable after a period of time. You may want to find out the best mortgage rates today to get the benefit out of various bank's loan programs.
Who Are Interest-Only Loans Good For
1 - These kinds of loans are great for people who think they’ll earn more money down the road and need a home loan that’s larger than what they can afford at that moment. In today’s economy, this is rather risky to assume.
2 - These kinds of loans are great for people who have incomes that fluctuate. It allows you to pay interest during lean months and some of the principal in good months.
3 - People who choose to flip their homes or refinance before that interest-only period is up can benefit from these as well.
Why Should People Avoid Interest-Only Loans
These loans are rather risky especially for folks who get the kind of loans they never could afford in the first place. If you’ve got money issues that never seem to resolve themselves before the loan period rate is over, you’re going to have a hard time making those higher payments.
When you have an interest-only loan, you’re not paying on the balance and are not building the equity in the home. If you’re looking to refinance, this could be a huge bump in your road when the interest-only period is over.
Why Do These Loans Have Such A Bad Rep
Interest-only loans got a very bad rep during the housing bubble. Most people got them to achieve bigger mortgages they normally would not have been able to obtain. When home prices dropped, owners found themselves with larger loans than their home was valued at. They, then, found themselves unable to refinance their homes.
Interest-only loans are great for savvy investors who are already informed risk takers; not a person getting an over his/her head. This type of loan isn’t for people looking to achieve a larger mortgage. If you can’t afford the house through other means, then you certainly should look at a home that’s more affordable rather than get an interest-only loan.